The age-old truism of higher risk, higher return, still holds today. So if you are offered a cash investment which is low risk, expect the return to be commensurately lower when compared to other riskier investment such as equities.
There have been any number of high yielding cash-based investments offered recently. However, whilst they may sound attractive, they are more than likely just another example of investments being too good to be true.
So what can you do?
- Check out the investment – in particular the credit quality. Do research to determine whether the company offering the product is legitimate and healthy enough to pay its’ debts.
Solicitors’ mortgage funds
These are a supposedly low-risk investment that lately, have obtained a lot of bad publicity. In these instances several dishonest solicitors have encouraged individuals wanting a high-income investment to part with their money – permanently.
Mortgage funds generally offer a low-risk income generating investment. Whilst larger Fund Managers offer these products, solicitors have also offered similar products – facilitating money flow between those who require money, to those who want an income from their money. The solicitors would match up the borrowers and the lenders at rates that were acceptable to those involved.
Whilst this is fine in theory, it has not always worked in practice. The solicitors did not have the resources to check out the credentials of all the borrowers – i.e. their ability to pay back the money. This meant that individuals who could not borrow from other sources because they were not considered a good bet to repay the debt, would go to the solicitors. The solicitors would then pass the loan back to individuals who were after a higher rate of return. However, these individuals then had a bad habit of foregoing the loan, and the investors were left with nothing or virtually nothing.
Individuals that cannot borrow from a low rate institution are generally a higher risk. Why would you borrow money at 10% if you could borrow at 7%? Mortgage funds are not a bad investment, but make sure that the provider you use is reputable, experienced and has the resources to manage your money.